2. Consider the following market for used cars. The set of possible quality types is given by the interval (0, s), with each type having the same probability. Any car's true quality is known only by its seller. Each seller values their car at 015, yet may choose instead to sell the car for p. Buyers expect to receive 02u -p if they purchase, and 0 if they do not purchase, where u is the buyer's expectation of quality. a) Under what circumstances should trade take place? Explain. b) Determine, given any p, a buyer's anticipation of quality, u. c) Given your answer to b), determine the condition which describes a buyer's purchase decision given any price. Under what circumstances can market trade occur?

2. Consider the following market for used cars. The set of possible quality types is given by the interval (0, s), with each type having the same probability. Any car's true quality is known only by its seller. Each seller values their car at 015, yet may choose instead to sell the car for p. Buyers expect to receive 02u -p if they purchase, and 0 if they do not purchase, where u is the buyer's expectation of quality. a) Under what circumstances should trade take place? Explain. b) Determine, given any p, a buyer's anticipation of quality, u. c) Given your answer to b), determine the condition which describes a buyer's purchase decision given any price. Under what circumstances can market trade occur?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.5P

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